Cusick’s Corner: VIX Not Confirming

We have seen quite the move to the upside this Midday, with the S&Ps right at the high of the day, 1584. I mentioned yesterday that the Small Caps, IWM, were lagging and that was a concern but overnight and into the Midday they have rebounded nicely and are leading at this point. The volumes and the advanced declines are positive as well, which for the current longs is a plus but the VIX is not confirming this recent strength in the market. The VIX is off its lows of the day and right now well off the lows we saw in mid-March, which means fighting the urge to chase this market to the upside is not really advised. This will be hard for those who were not positioned long into this run but I want to see universal confirmation of upside strength. See you After Hours.

Stock market averages moved broadly higher after the Fed released minutes from its latest interest meeting and after markets overseas scored solid gains Wednesday. The minutes, released five hours earlier than usual, indicated that Federal Reserve members expect to slow the pace of quantitative easing by the middle 2013, but the text contained no real new information. Meanwhile, European markets scored solid gains, with leadership from some of the financial names. France’s CAC 40 gained 2 percent and Germany’s DAX added 2.3 percent. In other markets, crude oil dropped 31 cents to $96.89 and gold gave up $16 to $1570.5. However, on Wall Street, the Dow Jones Industrial Average is up 125 points and moving to record highs. The NASDAQ surged 53.5 points. CBOE Volatility Index (.VIX) is up .03 to 12.87. Overall trading volumes are picking up and running at a relatively brisk pace. 4.6 million calls and 3.9 million puts have traded across the exchanges through 11:30am ET.

Bullish Flow
Microsoft (MSFT) sees another day of heavy trading. The stock was up 3.7 percent Tuesday and has added another 2 percent to $30.20 in heavy trading of 40 million shares today. Meanwhile, 280,000 options have traded on the software giant. 189,000 calls and 91,000 puts so far. The flow includes a morning buyer of 10,000 June 31 calls for an average of 37.5 cents per contract, according to data from one of the options exchanges. Volume in the contract is now approaching 25,000. April 30 calls are the most active in MSFT. 30,745 contracts have changed hands. The increased activity comes ahead of Microsoft’s earnings, due out after the closing bell on April 18 – which is the Thursday before expiration Friday.

MBIA (MBI), a McLean, VA credit insurance company, is trading up 21 cents to $10.69 and options on the stock are busy today. About 25,000 calls and 2,500 puts so far. One large spread is driving much of the activity, as an investor bought 10,000 August 13 calls on MBI for $1.17 and sold 10,000 August 16 calls at 54 cents. The spread, for 63 cents, appears to be a new position because volume exceeds open interest in both contracts. If so, the call spread seems to be expressing a bullish view on the stock and expectations that shares might climb north of $13 (or 13.63 breakeven, excluding transaction costs) through the August expiration.

Bearish Flow
Intel (INTC) adds 65 cents to $22.39 in heavy trading and, along with Cisco (CSCO), is the best percentage gainer in the Dow through midday Wednesday. Options on the chipmaker are actively traded as well. 85,000 puts and 73,000 calls so far. The top trades are part of a spread, in which the investor apparently sold 15,500 April 22 puts on Intel at 35 cents and bought 15,500 April 23 puts for 95 cents. The spread, at 60 cents, might be a position adjustment because, while the activity in the April 23 puts is opening, the April 22s might be closing. Shares are up nearly 7 percent on the week and an investor might be adjusting a position in short-term puts after the run higher. The increased activity in Intel comes ahead of earnings, the afternoon of Apr 16.

Applied Materials (AMAT) is up 33 cents to $13.63 and options volume on the semiconductor equipment maker is running 2X the daily average. Roughly 8,000 puts and 2,500 calls have traded in AMAT so far. July 12 puts are the most active. 5,445 contracts have changed hands against 5,185 in open interest. April 13 and 14 puts are the next most actives in Applied Materials today, as some investors are possibly rolling out from Apr puts to Jul ahead of next week’s expiration.

Unusual Volume
Microsoft (MSFT) options volume is running 3.5X the (22-day) average, with 258,000 contracts traded and call volume accounting for 68 percent of the volume.

First Solar (FSLR) options volume is 3X the average daily volume with 62,000 contracts traded and call option volume representing 52 percent of the activity.

Barrick Gold (ABX) options volume is running 4X the average daily with 90,000 contracts traded and call volume accounting for 59 percent of the activity.

Increasing options activity is also being seen in iShares Japan Fund (EWJ), Ciena (CIEN), and HCA.

Implied Volatility Mover
Implied volatility in the options on Barrick Gold (ABX) is moving higher, as the stock slides to new 52-week lows Wednesday. The stock is down $1.76 to $24.93 in heavy trading of 19.4 million shares on another rough day for the gold bugs and on news a Chilean court has suspended one of the Barrick’s mining projects. The stock is down and options volume is up to almost 100K contracts. 57,000 calls and 40,000 puts so far. Meanwhile, 30-day implied volatility in the options on the stock jumped 12 percent to 34.5.

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Joe Cusick

Joseph Cusick is the Senior Vice President of Education and Senior Market Analyst for OptionsXpress. He and his team are responsible for creating education through in-house initiatives and third party partnerships. Joseph also seeks out technologically scalable educational pathways for self-directed investors of all experience…